Domestic Gas and Electricity (Tariff Cap) Bill

Lord Stevenson of Balmacara Excerpts

2nd reading (Hansard): House of Lords
Tuesday 22nd May 2018 Lords Chamber

[Lord Stevenson of Balmacara (Lab)]

My Lords, I thank the Minister for introducing the Bill and for giving it a good going-over in terms of its various elements. It is a very short Bill, but sometimes the shorter Bills are the more contentious ones that come before us. We will have to see how we get on with this.

I should also apologise for the non-appearance of my noble friend Lord Grantchester, who would normally introduce Bills of this type—he has a lot of experience and knowledge of them—but unfortunately he is ill and cannot be with us today. I am sure that your Lordships will join me in sending him good wishes for a speedy recovery.

[Noble Lords]

Hear, hear.

[Lord Stevenson of Balmacara]

We are very pleased that the Bill is finally before the House today. The 2017 Conservative manifesto committed to implementing an energy price cap, and it has been Labour Party policy since 2013 to introduce a price cap on consumer energy bills. So, as the Minister says, we should have a harmonious time on this Bill. But as background, let us be clear that National Energy Action found that, on average, some 9,700 people die each year because they live in cold homes. To put that in context, it is close to the number of people who die from breast or prostate cancer every year. So although the principle underlying the Bill is good, we remain concerned that, as drafted, it does not go far enough. Why? Because our energy market is fundamentally broken and needs to be changed. The Bill is silent about the fundamental changes that need to be made.

I start with the question of why the Bill does not provide any direction from the Secretary of State on what might be a preferred level for the cap. The Bill merely states:

“The authority must exercise its functions … with a view to protecting existing and future domestic customers who pay standard variable and default rates”.


In so doing, Ofgem must consider a number of factors, including creating incentives for suppliers to improve efficiency, enabling suppliers to compete effectively, maintaining incentives to switch between suppliers, and the need to ensure that the holders of supply licences which operate efficiently are able to finance activities authorised by that licence. It is a good list, but it is a very interesting list, because it is largely focused on maintaining the present structure of the industry. Where is the need for Ofgem to devise a scheme that benefits consumers? We want to promote fair and transparent competition within the energy market but not at the cost of consumers, neither literally nor metaphorically. Why do the Government insist on a market-facing approach? Is it perhaps because the main aim of the Bill is to promote switching, not to protect vulnerable consumers?

Secondly, why is there no duty on Ofgem to consult on how such measures can accurately be quantified? Will they form part of Ofgem’s cap methodology consultation, and if not, how will Ofgem reach a determination among these somewhat contradictory goals?

Thirdly, we welcome the fact that the Government are bringing in an absolute cap. We are agreed that it will help customers, especially those languishing on standard variable tariffs. However, this absolute cap is time-limited; it will be in place for only a few years before it is lifted. While there are reviews of switching practice going on, the Government have not answered the fundamental question of how they expect the energy market to be fixed by the time we reach the end of this process. Surely we should not be changing things in an arbitrary way until the landscape of the energy market has changed and all customers benefit from low energy prices, especially those who have not switched from SVTs. Perhaps the solution would be to require that a relative price differential mechanism should be established and implemented while the absolute cap is in place. This would at least have the effect of preventing the current and perverse “tease and squeeze” culture of trying to attract customers with cheap or loss-leading tariffs and then rolling these customers on to very expensive SVTs, as commonly happens in the market. A relative price differential, absent the fundamental reform which is required, would at least drag SVTs down towards cheaper tariffs and hinder the “tease and squeeze” approach.

Fourthly, what is the process when the cap comes to an end in 2020? The Bill merely states:

“The Authority must carry out a review into whether conditions are in place for effective competition for domestic supply contracts”.


It does stipulate that the review must include an assessment of progress made in installing smart meters, but unfortunately that is as good as it gets. We think it is highly unlikely that the smart meter rollout will get anywhere near completion by that date. Why not use the completion of that programme as a point at which to review the capping scheme, without a sunset clause?

Fifthly, what exactly is a “clear and realistic definition of effective competition”? The magazine Which? says that,

“the criteria for effective competition are not defined so it is not certain under what circumstances the cap will be lifted or how its success will be judged”.

Sixthly, we are concerned that the consumers who benefit from Ofgem’s safeguard tariff may actually see their energy bills rise as a result of the cap. If the overall price cap consumes the safeguard tariff, vulnerable customers could see their prices go up by more than £30 as a result of the difference between the safeguard situation and the likely absolute tariff. When responding to these concerns on Report in another place, the Minister agreed that it would be perverse for some of the most vulnerable customers to see their energy prices go up as a result of a price cap and agreed to give the issue further consideration. The Minister did not mention it in his introductory speech, but I hope he has reflected on this and will, during the passage of the Bill, require Ofgem to identify affected customers and put in place measures to offset their loss or else not proceed with removing the safeguard tariff.

Seventhly, we are concerned that, because this Bill is at heart intended to promote switching as a means of reforming the energy market, it will not of itself reduce prices. According to the Dieter Helm review, the cost of energy is significantly higher than it needs to be to meet the Government’s objectives and, in particular, to be consistent with the Climate Change Act and security of supply. Further, energy policy, regulation and market design are not fit for the purposes of the emerging low-carbon energy market as it undergoes profound technical change. Since this was a review commissioned by the department, I think it is fair to ask the Minister why the Bill does not seek to remedy the problems identified by Dr Helm. If, as Dr Helm suggests, we are moving towards a decarbonised, digital, smart electric energy world, why are customers not benefiting more from the prospect of ever-lower costs from cleaner energy? To narrow it down to something at the heart of the Bill, why are the Government even considering excluding green energy from the cap?

I see from the list of speakers that we are going to have the benefit of the wisdom of the noble and learned Lord, Lord Mackay of Clashfern, later on. I have a suspicion—I may be wrong—that he is going to talk about appeal mechanisms and will want to ensure that there is a proper merit-based appeal mechanism to the CMA if any company, the prices of which are capped by the Bill, is adversely affected. I do not want to anticipate his speech because I look forward to hearing it, but I put it to him that there may also be a case for civic agencies such as Which? or Citizens Advice to be able to raise appeals on behalf of consumers in a symmetrical, although not identical, manner. Perhaps he will consider this suggestion carefully when he comes to his amendments at a later stage of the Bill.

As I have said, the Bill does not provide an answer to the broken energy market. The rules in place are contradictory and self-cancelling. The place of green energy is equivocal. Between 2007 and 2013, electricity bills soared by 20%, while in the past year alone every household in the UK paid an average of £120 towards the dividends extracted by energy company shareholders. Over the past few months, report after report and news story after news story has detailed the unfairness of the current system. However, it must be noted that the final bills that consumers face are not simply a consequence of manipulation by some supply companies. As the BEIS Select Committee has highlighted, network-fixed costs make up the second highest element of a dual fuel energy bill.

Reform of the market is critical not just to instil fairness and affordability but to ensure that Britain has an energy system fit for the future. We are experiencing a pace of change in the energy sector that has never been seen before. Batteries, storage and smart systems are transforming demand and supply. There is a move to smarter, more decentralised forms of energy generation and supply, emulating many of the models established across Europe, along with the potential of accessing a low-carbon market that is, according to Goldman Sachs, worth over $600 billion.

The main problem is why the system is not treating vulnerable consumers fairly. The Business, Energy and Industrial Strategy Committee found that vulnerable and low-income families were especially affected by poor-value tariffs, with 83% of those living in social rented housing, 75% of those on low incomes, 73% of those with no qualifications and 74% of disabled customers on a standard variable contract. It was clear from the committee’s findings that, even with the advent of smart meters, these groups will still require protection from overcharging. I therefore urge the Government to reconsider their opposition in the other place to amending Clause 7 to ensure that, when it considers “effective competition”, Ofgem has regard to the impact of removing or extending the cap in relation to vulnerable and disabled customers.

Finally, I am concerned that there is no timetable in the Bill and no guarantee that the price cap will be in place for this winter. The Bill currently states that Ofgem must introduce a cap “as soon as practicable” after it is passed, but Ofgem has already said that it would take around five months after the Bill receives Royal Assent to enact a price cap because it has a statutory duty to consult power companies. We need to look at this again. Ofgem currently estimates that it,

“will look to set the level of the cap over the autumn and bring the cap into effect at the end of this year”.

But that is half way through next winter—the cap will not even be in place when the weather turns in autumn this year. The Bill would be greatly improved by the inclusion of a hard deadline by which the cap must be in place, and we will seek to include such a deadline of the last weekend in October 2018, when the clocks go back.